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Economics in a European
Context
Origins, meaning and nature
of European economic
integration
© Economics Department, King’s School, Chester
Origins of the European Union
 Immediate post WWII problem in Europe was one of reconstruction
 Marshall Aid and OEEC
 European Unity pursued through economic means
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1948 Customs Union (Belgium, Luxembourg and Netherlands)
1951 European Coal and Steel Community
1957 Treaty of Rome created EEC
UK favoured ‘looser integration’ (EFTA)
 European integration has developed through
 enlargements
 deepening
 widening
© Economics Department, King’s School, Chester
Origins of the European Union
 Enlargement has seen more countries participate in economics
integration in addition to original six
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1973 UK, Ireland, Denmark
1981 Greece
1986 Spain, Portugal
1995 Sweden, Austria, Finland
2004 Poland, Hungary, Czech Republic, Slovenia, Slovakia, Estonia,
Latvia, Lithuania, Malta and Cyprus
 ‘Deepening’ of its economic liberalisation, common policies and
regulations and commitments from members
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extension of CAP to cover more commodities
strengthening of powers of EU Competition Policy
principle of mutual recognition (Cassis de Dijon)
harmonisation of product standards
1986 – 1992 Single European Market Programme
© Economics Department, King’s School, Chester
Origins of the European Union
 ‘Widening’ of the scope of its economic powers
 ‘own’ resources now include tariff revenue from CET and agricultural
levies, share of member states’ VAT receipts (1%), levy on member states’
GNP (up to 1.27%)
 European environmental policy
 European Regional Policy
 Common Fisheries Policy
 Schengen convention
 Social Charter
 Single currency and common monetary policy
© Economics Department, King’s School, Chester
Meaning of economic
integration
“Economic integration refers to the merging
together of national economies and the
blurring of the boundaries which separate
economic activity in one nation state from
another.”
Nigel Healey, The Economics of Europe (1995)
© Economics Department, King’s School, Chester
Meaning of economic
integration
 The boundaries which separate economic activity reduce the free
movement of goods, services and the factors of production between
member states
 They result in a lack of integration since markets are segmented along
national lines
 The purpose of economic integration is to replace separate national
markets with a ‘single’ market that transcends national boundaries
 In Europe this should mean that prices converge to their lowest level
and are determined by demand and supply at the European, rather
than the national, level
 As a result, competition is increased and consumers benefit from
allocative, productive and dynamic efficiencies
© Economics Department, King’s School, Chester
Nature of economic integration
 Negative integration
 this refers to the removal of boundaries and distortions to the free
movement of goods, services and the factors of production
 for example, negative integration would involve the removal of tariffs and
quotas on intra-EU trade and subsidies for domestic producers
 Positive integration
 this type of integration requires agreement on common rules and
standards and, therefore, some ‘pooling’ of decision making
 for example, positive integration would include a common EU policy for
the agricultural sector, for environmental taxation, for competition issues
or, indeed, rules for the conduct of fiscal and monetary policy in the EU
 Market integration
 this refers to attempts to create single, borderless, European wide markets
 Policy integration
 this refers to measures to bring about greater co-operation and coordination of economic policies
© Economics Department, King’s School, Chester
Negative economic integration:
tariff and quota removal
Price
Duk
Suk
Tariffs distort the free
movement of goods and
services by raising their
price, reducing demand
and replacing EU supply
with domestic supply.
Peu + t
Peu
Quotas have
a similar
effect in
restricting
foreign
supply and
raising the
domestic
price
Quantity
© Economics Department, King’s School, Chester
Negative economic integration:
domestic subsidy removal
Price
Duk
Suk S
uk + subs
Governments can achieve
similar effects to tariffs
and quotas by
subsidising domestic
firms. Free movements of
goods and services is
distorted by encouraging
domestic production and
reducing imports.
Peu
Quantity
© Economics Department, King’s School, Chester